Capitalism Shortcircuited

Capitalism is the finest creator of wealth the world has ever seen, when it is allowed to run its course. The problem has become the desire of politicians to "protect the little guy" and smooth the business cycle. Capitalism will always be characterized by booms and busts. This is the true essence of capital formation, concentration, massive uneven wealth creation and then the inevitable bust as too much capital is deployed in a concentrated manner. Proving the axiom of too much of a good thing is a bad thing. Applying this truism to the mortgage banking debacle, "free money" in the form of zero down payment mortgage financing, no income verification mortgages and the panoply of other ridiculous mortgage financing schemes, led people who had no business getting a mortgage to obtain one. The federal government through the CRA, and Fannie and Freddie facilitated the great housing bubble. The builders, real estate agents, mortgage brokers and banks all piled in, seeing the money they could skim at every point in the process. To not jump in they would have had no business sense. Legislators of both major political parties were more than happy to receive campaign contributions from all the associated parties, and keep the financing wheels greased. Of course, the investment banks were the ones who made the most money off the mortgage fiasco, as they sliced and diced the bonds to sell to investors. However, as is true of everything in life, all good things must come to an end. This is where the problem started.

I cannot state the following clearly enough: The investment banks should have been allowed to fail. They should have been forced to bear the burden of their losses as they all took in the previous gains from the business. The main reason they were not forced to fail is not because of fear of systemic failure. The primary reason was the United States had a Secretary of the Treasury named Hank Paulson, former Chairman and CEO of Goldman Sachs. He along with the many hundred if not thousands of ex Goldman employees who staff government positions, saw that their huge retirement plans, stuffed with Goldman stock, would be crushed. If essence, he and his cronies throughout the government pressured a know nothing Congress to bail out the banks and thereby save their own asses. A failure of the investment banks would surely have caused disruption in banking markets, but other banking entities in the US and other countries could have stepped forward and taken up the slack. Instead we have a chicken coop run by the foxes periodically slaughtering the chickens and saying a fisher did it.

What this results in is the privatizing of the gains by the banks, and the socializing of the losses to the taxpayer. A colossal ripoff if there ever was. We should have let capitalism run its course. Banks would have failed, homes would have been lost, but the US taxpayer would not have been left holding the bag.